Download The effect of Australian cash rate target announcements

Monetary surprises and financial market reactions: The effect of
Australian cash rate target announcements
Xinsheng Lu 1, *, Francis In 2, Sha Tao 1
1
Department of Finance and Banking, Nanjing University of Finance and Economics,
Nanjing 210046, China. Email: [email protected]
2
Department of Accounting and Finance, Monash University, Clayton Campus, Vic 3168, Australia
Email: [email protected]
_________________________________________________________________________________
ABSTRACT
The paper investigates the impact of unexpected monetary policy on three classes of
Australian financial futures assets—ASX stock price index futures, AUD/USD exchange
futures and 3- and 10-year Treasury bond futures contracts. This study contributes to the
literature by using 30-day and 90-day bank accepted bill (BAB) rates to gauge the
unanticipated component of cash rate target changes in the Australian money market, and
by simultaneously modelling effects of the cash rate target surprises and other key
macroeconomic announcements. Empirical results indicate that the Reserve Bank’s cash
rate announcements have a strong contemporaneous impact on all futures markets when
expected monetary policy changes are measured by using 30-day BAB rate. The degree of
significance for these monetary announcement effects depends largely on how we measure
the monetary surprises. The 30-day BAB rate is the best proxy of the expected monetary
policy changes. The effect of monetary surprises on volatility of all futures instruments,
except the stock index futures, is still significant and complete when other key
macroeconomic announcements are considered simultaneously.
JEL classifications: C22; E44; G12; G14
Keywords: Monetary policy surprises, asset return volatility, financial market reaction to
monetary news
________________________________________________________________________________
*Corresponding author: Department of Finance and Banking, Nanjing University of Finance and
Economics, Nanjing 210046, China. Tel: +86-29-87081705; Mobile: +86-13279297429; Email:
Xinshenglu @hotmail.com
1. Introduction
Overnight cash interest rate target is the core of monetary policy in Australia and
many other countries, such as in the U.S., Germany, the United Kingdom and New
Zealand. This paper investigates how monetary policy in general and the cash rate
target in particular, impact on Australian financial futures markets. The paper
examines the unexpected announcement effects of the cash rate movements or the
real “news” effect of the monetary announcements on the All Ordinary Index
futures contracts, the AUD/USD foreign exchange futures contracts and 3- and 10year bond interest rate futures markets. The main objectives of this paper are twofold: 1) the impacts of expected and unexpected monetary policy announcements,
2) the integrated effects of monetary “news”, together with effects of major
macroeconomic announcements.
The reactions of financial markets to the central bank’s monetary policy stance and
open market operations (OMOs) are essential for central banks and financial market
participants. The topic confronted here is important to central banks because central
banks need to know how monetary policies are transmitted to financial markets and
how efficient the transmission process would be, since the efficiency of monetary
policy is dependent on effective communications between central banks and
financial markets. For financial markets, how asset prices react to the monetary
shocks is an essential part of price discovery process. Unfortunately, this is also one
of the least understood issues amongst academics, policy makers and market
practitioners.
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This paper investigates the effect of unexpected monetary policy effect on
Australian interest rate futures, foreign exchange rate futures markets and the
Australian stock index futures contract, for the period from January 1996 to June
2005. Two distinctive approaches are employed to measure the expected changes in
Australian cash rate target – the 90-day bank bill rate and 30-day bank bill rate from
Australian money market.
We then examine the effect of the central bank’s
monetary surprises on financial futures markets with an extended threshold
GARCH (T-GARCH) model. The asymmetric threshold GARCH-class model
enables us to test the impact of monetary surprises and the key macroeconomic
announcements on the Australian financial asset returns and return volatility.
The plan for the remainder of this paper is as follows. Section 2 reviews the
previous research related to this topic. Section 3 briefly describes the role of
Australian cash rate target, and presents a descriptive statistics for the cash rate
target movements and the ways by which we measure the cash rate surprises.
Section 4 provides preliminary analysis on our financial market data and Section 5
specifies the empirical modelling framework. Section 6 presents the major
empirical results from the application of the TGARCH model. Section 7 concludes
the paper.
2. Literature review
Li and Engle (1998) examine the reaction of the treasury futures market to the
scheduled announcements of prominent U.S. macroeconomic data by using openclose returns and volume data. Their study reveals heterogeneous persistence from
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scheduled and non-scheduled announcements. However, they do not find
statistically significant increase in expected open-close returns, i.e. macroeconomic
risk premium on the announcements days. Li and Engle (1998) show that
announcement-day volatility plays a substantial role in short-term volatility
forecasts, which is contrary to Jones, Lamont and Lumsdaine (1998)’s findings that
the announcement-day shocks do not have subsequent impact on daily volatility.
Evidence from Li and Engle (1998) suggests strong asymmetric effect of scheduled
announcements--positive shocks depress volatility on consecutive days, while
negative shocks increase volatility. Evidence on conditional volatility and volume
shows that the market process the information from scheduled news more quickly
than non-scheduled news, which supports the asymmetric information trading
hypothesis. Information asymmetry is decreased after news disclosure, however,
convergence in beliefs does not happen instantaneously. One of their key findings
is that the strong asymmetric effects in the T-bond futures market where negative
shocks increase conditional volatility on consecutive days. Also, their study shows
that bad news from scheduled announcements brings stronger asymmetric effects
than that from unscheduled news announcements.
Roley and Sellon (1998a) examine how treasury security yields, stock prices and
federal funds futures rates respond on Federal Open Market Committee (FOMC)
meeting dates when expected policy actions do not occur. Their empirical results
suggest a small but statistically significant reversal rates when an expected federal
funds rate target change does not occur. The existence of significant nonannouncement effects suggests that information is conveyed to financial markets
even when no policy action takes place. The size of effect is consistent with the
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view that the information causes financial markets to temporarily postpone, but not
eliminate the possibility of a future policy action, which means that the information
content provided by the no-change policy stance appears limited to the timing of the
policy actions and not the basic assessment about the long run stance of monetary
policies. In contrast, for nonzero target interest rate changes, Cook and Hahn (1989)
and Roley and Sellon (1998a) find statistically significant responses of long-term
interest rates in different time period, suggesting that nonzero and zero target
interest rates changes (or non-announcement) apparently provide different
information for financial markets.
Roley and Sellon (1998b) also tested wether the market reaction to policy nonannouncements is larger after February 1994 when the fed began making all of its
nonzero changes in the federal funds rate target at FOMC meetings. They find that
the response to non-announcements is only larger for a near-term federal fund
futures rate, but not for the treasury security yields under investigation, suggesting
only minor differences in the information content of non-announcements after the
FOMC began announcing target changes after meetings. These results, all together,
suggest that monetary policy decisions can be informative to financial markets even
these decisions do not involve any actual policy action, this, inturn, support the
notion that market expectations of future policy actions are important determinant
of the market interest rate behaviour.
Bonser-Neal et al. (2000) presents a rational expectation based model of the
exchange rate response to U.S. monetary policy actions. They assume that the US
economy is subjected to economic shocks and the Federal Reserve may choose to
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offset these shocks by changing its federal fund rate target, and foreign central
banks alter their policies in response to either common global economic shock or to
the Fed action itself. Under those assumptions, they show that the response pattern
of spot and expected future exchange rates depends on the both the predictability of
Federal Reserve actions and the extent to which foreign central banks react to the
Fed’s monetary policy changes. Bonser-Neal et al. show that the dollar can
appreciate for a number of future periods in response to a contractionary US policy
action, with the greatest value occurring in some future period. And, this exchange
rate response pattern is more likely as the predictability of the Federal Reserve
policy actions declines. Their results suggest that the responses of spot and future
expected exchange rates in anticipation of a policy action could be larger than the
responses to the policy action itself. They also find that the spot and future values of
the dollar can appreciate in anticipation of a Federal Reserve tightening policy, but
then depreciate once the action is taken.
Kuttner (2001) examines the impact of monetary policy actions on the bill, note,
and bond yields, using U.S. Fed funds futures rates as a measure of expected
component of policy changes to separate expected and unexpected components
changes in the target funds. Kuttner finds that interest rate market’s response to the
anticipated part of monetary policy changes is small while its reaction to the
unanticipated surprises is large and highly significant. He contends that the failure
of previous studies in documenting the close link between monetary policy actions
and market reactions is due to the inability to disentangle the anticipated component
of the policy change from the unanticipated component.
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Demiralp and Jorda (2004) examine how the Fed’s target rate announcement
affected the term structure of nominally risk-free Treasury securities since the Fed
began publicly announcing its target in February 1994. They argue that the practice
of publicly disclosing changes in the target level federal funds rate affects the
monetary transmission mechanism either by increasing the effectiveness with which
the Fed manages federal funds trading around the target or by regimenting the
formation of expectations and the price discovery process of Treasury securities.
Their results suggest that term rates react strongly when the Fed initiates a policy
stance reversal, which is consistent with the rational expectation hypothesis and
with the market’s better anticipation on the timing and the nature of future policy
moves.
With regarding to Australian context, it is still rare to find studies addressing the
interest rate markets, especially the Treasury bond market’s responses to the
Reserve Bank’s policy announcements1. This paper contributes to the literature by
focusing on the effect Australian cash rate target announcement on Treasury bond
markets, ASX stock index futures (ASX-SPI) as well as AUD/USD exchange
futures markets. The paper also adds to the literature by examining the effect of
monetary policy on financial markets in a context in which other key
macroeconomic factors are also incorporated.
3. The cash rate and Australian monetary policy
1
Kearns and Manners (2005) have recently examined the impact of monetary policy on exchange
rate markets in four countries including Australia, by using an event study model with intraday data.
Their results indicate that monetary policy changes account for only a small part of the observed
variability of exchange rates in countries covered. They suggest the differences monetary effect on
exchange rate depend on how the central banks manipulate expectations regarding future policy
moves.
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3.1 The cash rate and its influence on financial markets
Before examine the impact of the monetary policy on Australian interest rate,
foreign exchange rate and stock index futures markets, we need to briefly describe
the role of cash rate target in Australian monetary system and present a descriptive
statistics for the cash rate target movements and the ways by which the cash rate has
been announced to the financial markets in the last decade or so.
The single main instrument of monetary policy in Australia is the short-term
interest rate, often referred as the cash rate, which is the market interest rate on
overnight funds. The cash rate target, functioning as the policy instrument for the
Reserve Bank under the current Australian monetary regime, is periodically
adjusted by decisions of the Reserve Bank board and is publicly announced to
financial markets along with explanations by the Bank for the change. The cash rate
has a very strong influence on other interest rates, and therefore helps to set the
level of short-term interest rates in the wider economy. This is true both for money
market rates and for key market rates of commercial banks. Financial intermediary
rates tend to move in line with movements in the cash rate, which in turn, gives
monetary policy a powerful influence over the broader financial market and
aggregate economy.
Current Australian monetary policy operates through a single main instrument,
which is sharply different from what it was before financial deregulation taking
place over the decade to the mid-1980s. In the pre-deregulation period, monetary
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policy operated through a mixture of financial-market operations and direct controls
on markets and financial institutions. These included controls on bank interest rates,
reserve requirements and various other balance-sheet restrictions. A change in
monetary policy under this system could be achieved through a range of different
mechanisms or through some combination of them. This conventional monetary
policy system gradually became ineffective as markets developed corresponding
ways of avoiding regulations through growth of the unregulated parts of the
financial sector. With the current deregulated financial market system, Australian
monetary policy becomes more transparent and consistent as it works directly
through the single short-term interest rate--the overnight cash interest rate for interbank exchange settlement funds.
The monetary policy in Australia is hence implemented by influencing the
exchange settlement position with the banking system. By controlling the tightness
or looseness of the money market conditions the monetary authority influences
overnight interest rates directly and other interest rate indirectly. In turn, this
provides a mechanism by which the central bank attempts to achieve its policy
objectives, including its control of monetary aggregates, the stability of Australian
currency, full employment objective and the growth and prosperity of the economy.
Australian monetary policy can be divided into three periods by the way the cash
rate target is release into financial markets. These three periods broadly correspond
to three different stages of monetary policy communication arrangements at the
RBA. The first period is from July 1985 to January 1990, which corresponds to the
time period before a cash rate target was announced. During this period, the policy
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stance of the central bank was regarded as highly secret for the financial market.
The second period is transitional period from January 1990 to November 1997
during which the first articulation of inflation target and other important policy
initiatives were established. The third period extends from December 1998 until
March 2005, during which the statement on the conduct of monetary policy was
regularly released and the inflation-targeting framework of monetary policy was
formalised. The accountability and transparency of the Australian monetary policy
have been in place since then. Table 1 below presents some descriptive statistics of
moves in the target cash rate.
Table 1 Descriptive statistics of monetary policy announcements in Australia
___________________________________________________________________
Pre-announcement period Announcement period Regular announcement period
(Jul 1985 - Jan 1990) (a) (Jan 1990 - Nov 1998)
(Dec 1998 - Mar 2005)
___________________________________________________________________
No. of
cash moves
20
23
17
Proportion of
scheduled moves (%) 11
37
100
Mean Absolute
cash rate changes
129
87
35
Average no. of
trading days
between rate moves
59
86
91
_________________________________________________________________________
Notes: (a) During this period where there was no official target cash rate, policy changes were
identified as the midpoint of the informal band used by the RBA’s domestic trading desk.
Source: The cash rate movements data for Pre-announcement period was extracted from Dungey and
Hayward (2000). Data for the period after 1990 is from the RBA.
_________________________________________________________________________________
Three points we can distil from Table 1. First, the average size of cash rate target
moves has been significantly reduced. In the first period from 1985 to 1990, the
average absolute movement is 129 basis points. However, since December 1998,
the mean absolute cash rate movement has been reduced to 35 basis points.
Second, the average number of trading days between cash rate target moves is also
increased significantly since 1990. The smaller scale and longer time span of cash
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rate adjustments reflect the underlining fact of a healthier Australian financial
system: an increased transparency in monetary policy conducted under a more
stable macroeconomic condition. Finally, the proportion of cash rate target changes
occurring on the scheduled day has increased from 11% in the first period to 100%
in the third period since December 1998, reflecting the growing tendency to
announce the cash rate target in a set time on the day following the Board meetings.
3.2 Measurements of the cash rate surprises
As the sole monetary policy instrument, the cash rate target changes affect asset
prices to the extent that such changes convey new information regarding either
short- or long-term monetary policy objectives. An implication of efficient market
and rational expectation hypotheses is that, since markets are efficient, asset prices
should react immediately and unbiasedly to the unexpected component of
information contained in monetary policy—the “news” effect of the Bank’s policy
stance and market operations.
The key issue here is how we measure and separate the two parts of the information
regarding cash rate target announcements: the expected and unexpected component
of monetary news. Previous research on effect of monetary policy on interest rate
and exchange rate markets uses the entire news item (e.g., Jones et al., 1998),
market survey data (e.g., Lobo, 2002), and available monetary policy target futures
rates (Kuttner, 2001). In this paper, we use three alternatives methods to isolate the
element of surprise in monetary announcement. Our alternative techniques for
measuring the expected and unexpected components of cash rate target allow us to
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explicitly evaluate and separate the unanticipated element of cash rate target from
the anticipated changes.
The first approach used to distil the unanticipated component of target changes
utilizes information contained in the Australian 90-day bank accepted bill (BAB)
rates to gauge the market’s expectations of the likely changes in the Reserve Bank’s
cash rate target. This approach is based on previous findings that the 90-day bank
bill (or 3 month Treasury bill in the U.S. market) yield fully reflects the changes in
central bank’s policy target rate (Kuttner, 2001; Cook and Hahn, 1989). The
expected component of the cash target movement is then calculated by using the
following formula:
∆ Recrt, t = R90 d, t-1 - R90 d, t-( j – 1)
(1)
where R90 d, t-1 is 90-day BAB yield on the day before a target change, R90 d, t-(j – 1)
is 90-day BAB yield on the day immediately after the previous target change made
on day t-j. The monetary surprises, ∆Rucrt, t, are then calculated as the difference
between the actual target changes and anticipated target changes, ∆Recrt,,t , as shown
in equation (2):
∆Rucrt, t = ∆ Rcrt, t - ∆ Recrt, t
t-(j-1)
t-j
(2)
Fig 5.1: Time line of Australian cash
rate announcements
j days
(t-1)
t
j is the number of days between
two target changes
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The second alternative approach we used as a proxy for expected component of the
cash rate target in this study is the short-end interest rate quoted in Australian
money market—the 30-day bank bill (BAB) rate.
The rationale behind the
technique is that the 30-day BAB rate is the most flexible short-end interest rate.
The daily movements of the 30-day rate may possibly reflect the influence of
available information content that also motivates the changes of the Reserve Bank’s
cash interest rate target. We calculate the expected component of the cash target
movement by using 30-day BAB rate as in equation (1):
∆ Recrt, t, = R30 d, t-1 – R30 d, t-j + 1
(3)
where R30 d, t-1 is 30-day BAB yield on the day before a target change, R30 d, t-j + 1 is
30-day BAB yield on the day after the previous target change made on day (t-j).
The monetary surprises are then calculated as the difference between the actual and
expected target changes by using formula (2). The third approach is to take the
entire cash target change in estimation, which is used for comparison purpose.
Appendix 1 presents the dates and movements of the Reserve Bank’s cash rate
target for the period from October 1990 to March 2005. The unexpected component
of monetary policy changes is shown in columns (5) and (6), calculated by using
30-day and 90-day bank accepted bill rates, respectively.
4. Financial market data
The objective of this study is to analyse the Australian financial market reaction to
the release of the Reserve Bank’s cash rate target. The basic dataset we use in this
study consists of daily continuously compounded returns on three assets classes--
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AUD /USD dollar exchange rate futures, 3- and 10- year Treasury bond futures and
ASX stock index futures contracts. Daily AUD/USD exchange rate futures prices,
3-year and 10-year Australian Treasury bond futures prices and data for ASX stock
index futures contracts are obtained from the Sydney Futures Exchange (SFE). The
most frequently traded futures contracts are selected in all three futures markets
data. Daily percentage changes are used as returns for each security. The dataset
covers the period from January 1996 to June 2005.
Table 2 summarizes statistics on daily returns from four series. Daily mean returns
for all four markets are positive. The variances range from 0.0724 for the 3-year Tbond futures market to 1.553 for the ASX stock price index series. The sign of
skewness for the ASX stock price index is positive, indicating that distribution of
the series has a long right tail, while the other series with negative skewness have
long left tails. The distributions of all those series are thus not symmetric. Kurtosis
of all four series exceeds 3 and the distribution for the four series is leptokurtic and
more peaked than normal distribution. The reported probability for the Jarque-Bera
test is zero for all series, suggesting (at 1% significance level) that all series are not
normally distributed. The Augmented Dickey-Fuller (ADF) Test t-statistics is also
reported for the raw data series. The ADF test critical value at the 1% level is –
3.4362, the calculated t-statistics of all the variables for ADF tests are less than the
test critical values at the 1% significance level. Hence, the null hypothesis that any
one series in this group has a unit root is rejected. Thus all daily return series (daily
percentage changes) are of I (0), and they are stationary. The means and
autocovariances of all the series do not depend on time. The summary statistics
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suggest that a GARCH –class of model would be appropriate, along with an error
distribution that allows for greater kurtosis than normal distribution.
Table 2 Summary statistics on daily returns of ASX stock index futures (ASX-SPI),
AUD/USD exchange futures and 3- and 10-year T-Bond futures markets
___________________________________________________________________
The table below reports descriptive summary statistics for four futures markets—ASX
stock index futures (ASX-SPI), AUD/USD exchange futures (AUDF), 3- and 10-year
Treasury bond futures (TBF3y, TBF10y). µ is the mean and σ is the standard deviation.
Skew is the coefficient of skewness, Kurt is kurtosis. ADF is t-statistics value for
Augmented Dickey-Fuller test of unit root for all series. LB (10) is the value of Ljung-Box
test of randomness for the 1st through 10th order autocorrelation, asymptotically distributed
as χ2 [10] under the null hypothesis that the series is white-noise process in which all
autocorrelations be zero. Note that rejecting the null H0 means accepting an alternative H1
that at least one autocorrelation is not zero. The signs of “***”, “**”, “*” indicate
significance at the 1-, 5- and 10- percent level, respectively.
___________________________________________________________________
ASX-SPI
AUDF
TBF3Y
TBF10Y
µ
0.0539
0.0173
0.0012
0.0015
σ
1.5533
0.7457
0.0724
0.0719
Skew
10.1627
-0.2380
-0.0659
-0.1925
Kurt
319.4359
4.1041
4.5007
4.1050
ADF-t
-46.46376
-37.3336
-36.2809
-37.293
LB(10)
22.139***
15.260***
12.017
18.366***
___________________________________________________________________
5. The model
The GARCH (1, 1) model proposed by Bollerslev (1986) is widely used for
modelling the financial asset return volatility and has served as a benchmark model
now for studies dealing with financial market volatility. However, according to
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Andersen and Bollerslev (1997), and Li and Engle (1998), the standard GARCH
(1,1) models imply a geometric decay in the volatility autocorrelation structure,
which makes the model hard to accommodate strong regular cyclical patterns often
found in modelling the day-of-the-week effect and the announcement effect around
“news” disclosure days.2 A key point is that volatility on announcement days may
have both transitory component and non-transitory component due to either a shift
of beliefs caused by the disclosure or due to gradual convergence of beliefs. It will
be impossible to identify any volatility persistence with the standard GARCH (1, 1)
model if the transitory component dominates the process. Another drawback of the
standard GARCH model is that it cannot accommodate the potential asymmetric
leverage effect of negative shocks from various news announcements.
In order to deal with the leverage effect of market volatility from negative shocks,
and better accommodate the regular cyclical patterns as well as the potential
transitory component of return volatility on announcement day, we employ a
threshold GARCH (or TGARCH) model (Zakoian, 1994). Following Ederington
and Lee (2001) and Li and Engle (1998), we consider the Reserve Bank’s monetary
policy surprises and market operations, together with all other information flows, in
a single T-GARCH model, as in equations (4) and (5) so as to accommodate the
cyclical patterns of the monetary policy shocks and announcements, and also to
address the potential asymmetric leverage effect of negative shocks from various
news announcements. The extended T-GARCH model adopted for this paper can be
specified as follows:
2
Also as pointed out by Ederington and Lee (2001), the coefficients of past shocks estimated by the
GARCH (1,1) model with high frequency data tend to underestimate the influence of the most recent
and more distant return innovations and tend to overestimate the influence of the shocks at the
intermediate lags.
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Ri,t = bi,0 + bi,1 Ri,t-1 + b2 Mt + εt
(4)
where εt |Φt-1 ~N (0, ht), and
ht,1 = ω + α εt-12 + β ht-1 + γ I -t-1 εt-1 2 +
3
∑
θi Mt-i
(5)
i=0
In equation (4), Ri,t is the daily returns from market i, (i is one of the four markets
considered in this study) from day t-1 to day t. Mt is the unanticipated cash rate target
changes. We first use the 90-day bank accepted bill rate to gauge the market
expectation of the likely changes in the Reserve Bank’s cash rate target. The second
alternative approach we utilize as a proxy for expected component of the cash rate
target is the short-end bank bill rate quoted in the Australian money market—the
30-day bank bill rate. Equation (5) specifies our benchmark TGARCH (1, 1) for
conditional variance. Φt-1 represents the information set available at the end of day
t-1. In equation (5), I
-
t-1
is dummy variable, I
-
t-1
= 1 if εt < 0, I
-
t-1
= 0 otherwise.
Parameter α captures the ARCH effect while β captures the persistence in volatility.
Parameter γ is used to catch the asymmetric effect of return volatility. A significant
γ means that the negative innovation has a greater effect than the positive shocks.
Equations (4) and (5) will serve as our benchmark model for this study.
We also test the speed with which returns and volatility of financial markets
incorporate the news contents of the cash rate target changes by assessing the
lagged effects of the cash rate target movements on stock index futures contracts,
interest rate and foreign exchange rate futures markets. Three-day lags are chosen
because we test whether the lagged effect of the cash rate target movements on the
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selected financial markets dies out within a three-day period. The contemporaneous
and lagged effects are captured by parameter θi, where i = (0, 1, 2, 3).
This study also examines the combined effect of monetary policy releases and key
macroeconomic news announcements, on the Australian stock index futures market,
foreign exchange rates and interest rate futures markets. We are particularly
interested in the relative importance of each information flow, and the
interdependence and interaction of four streams of information inflows in
determining daily return volatility: (a) information flows of past volatility, (b)
information flows of monthly monetary policy review and release of the Reserve
Bank’s policy stance, (c) information flows of key macroeconomic announcements,
which include employment reports (EMP) by Australian Bureau of Statistics (ABS),
the consumer price index (CPI), growth rate of Gross Domestic Product (GDP)
announcements by the ABS, and
(d) information announcements on the U.S.
monetary policy changes—the Federal Reserve Banks’ announcement on Fed Fund
Target changes. The extended variance equation is then expressed as follows:
ht = ω + α εt-1 + βht-1 + γ I
2
-
t-1
3
4
i=0
j=1
εt-1 + ∑ θi MDt-i + ∑ φj Aj
2
( 6)
where Ait is for scheduled macroeconomic announcement dummy, representing the
Consumer Price Index (CPI), employment reports (EMP), and the growth rate of
GDP. Ait =1 if announcement j is released on day t, and Ait = 0 otherwise. MDt is
dummy variable for the monthly monetary policy release of the Reserve Bank’s
policy stance. MDt =1 for the first Wednesday of each calendar month on which the
Reserve Bank announces its monetary policy, and MDt = 0 otherwise.
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6. Empirical results
6.1 The Impact of the cash rate target announcements
Table 3 presents the empirical results of the impact of monetary surprises on the
volatility of Australian stock index futures market. Columns 1 and 2 contain
estimate results of the impact of cash rate target surprises, based on the separation
of unexpected and expected target movements using 30-day bank bill yields as the
proxy of the anticipated target changes. The contemporaneous impacts of monetary
policy surprises on the volatility of the stock futures index, captured by parameter
θ0, is positive and statistically significant at the 5 % level, while the lagged effects
of cash rate surprises on volatility, captured by θ1, θ2 and θ3 , respectively, are all
statistically insignificant. These results suggest that the monetary surprises from the
official cash rate target announcements increase share market volatility on the
monetary policy announcement days, and volatility then reverts to pre-surprise
levels on the days after the announcement. This finding is consistent with the idea
that the cash target interest rate surprises initially increase stock market volatility,
and that the volatility dies out quickly as soon as the market assimilates the new
information contained in such announcement. The impact of cash rate surprises on
the mean of price movements, captured by b2, is not found for the Australian stock
index futures market.
Columns 3 and 4 of Table 3 contain estimates of the impact of cash rate target
surprises, based on the separation of unexpected and expected target movements
using 90-day bank bill yields as the proxy of the anticipated target changes. The
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estimated contemporaneous impact of monetary policy surprises on stock index
futures contract is no longer significant when daily 90-day BAB futures rate is
used. The lagged effect of cash target surprises, captured by θ1,, θ2, θ3, respectively,
is insignificant, suggesting that the reaction of stock price index futures to monetary
shocks is completed on the target announcement day. This result provides new
evidence that new information contained in cash target announcements is quickly
assimilated into the stock prices in Australian share market. For comparison
purposes, we also report the estimation results with the Model 3 in columns 5 and 6,
by using unseparated total cash rate target changes as in Bonser-Neal et al. (1998,
2000) and Thornton (1998). The effect of monetary policy surprise on the stock
market, as expected, is not significant. This is supportive of the notion that in an
efficient market, share prices react primarily to the unexpected component of
information flows, or news. The impact of cash rate surprises on the mean price of
the futures contract, captured by b2, is insignificant again in the model either with
the 90-day BAB futures rate or with the actual target rate.
Table 4 presents maximum likelihood estimation results of the T-GARCH model
for AUD/USD futures markets. Parameter γ is positive and significant at the 5%
level in all three models, suggesting that the impact of past innovations on current
volatility is asymmetric in the AUD/USD exchange futures market. Columns 1 and
2 present the estimation results with Model 1, using the 30-day bank bill rate as the
anticipated component of cash rate changes. The contemporaneous impact of cash
rate target announcements on volatility of the currency futures market, captured by
parameter θ0, is negative and significant at the 5 % level, indicating that the Reserve
Bank’s monetary policy stance plays a key role in smoothing the currency market
19
and thus reducing return volatility on the policy announcement days. The policy
announcement effect on market volatility is incomplete, as the lagged effect on day
3 after the announcement day t, captured by θ3, is significant. Columns 3 and 4
show estimate results with Model 2, using the 90-day bank bill futures price as the
proxy of the anticipated target changes. The estimated impact of monetary policy
surprises is insignificant when the daily 90-day BAB futures rate is used as the
proxy of expected cash rate target changes. The impact of cash rate target surprises
on the mean of the currency futures contract, captured by b2, is significant in
Models 2 and 3, indicating that monetary surprises also affect the mean returns
from the AUD/USD exchange futures market when 90-day BAB rate or the actual
target rate changes are used as the proxy of the anticipated target changes.
Table 5 reports maximum likelihood estimation results of the T-GARCH model for
3-year bond futures markets. Parameter θ0, is negative and significant at the 5 %
level for Model 1 in columns 2 and 3, indicating that the Bank’s monetary
announcement plays a key role in smoothing the T-bill futures market and thus
reducing return volatility by influencing market participant’s beliefs and/or by
reducing the information processing period needed for the gradual convergence of
market expectations among participants. The impact of monetary policy is
insignificant when the 90-day BAB rate is used as the proxy of expected cash rate
target changes in Model 2 and when the entire cash target changes are used in
Model 3. The effect of monetary surprises on volatility of the 3-year bond futures
market is also complete, since all lagged effects are statistically insignificant. The
impact of cash rate target surprises on the mean of the 3-year bond futures market,
captured by b2, is statistically significant in Model 1 with the movement of the 30-
20
day BAB rate as monetary surprises, suggesting that monetary surprises affect the
mean returns of the long-term interest rate futures market.
Table 6 presents similar results for 10-year bond futures markets. The effect of
monetary surprises, with 30-day bank bill futures yield as the proxy of the
anticipated target changes, is negative and statistically significant at the 5% level in
Model 1 and significantly negative at the 10% level in Model 3. The effect of cash
rate target announcements is complete on the announcement day in Models 1 and 2,
as lagged effects are all statistically insignificant in these models. Coefficient b2 is
statistically insignificant in all three models, suggesting that monetary surprises do
not impact on the mean returns of the 10-year bond long-term interest rate futures
market.
6.2 The cash rate target and other key macroeconomic announcements
This study examines the combined effect of monetary policy releases and key
macroeconomic news announcements on the Australian stock index futures market
and foreign exchange rate and interest rate futures markets by simultaneously
incorporating three information flows of key macroeconomic announcements, as
well as overseas monetary policy shocks, into one single equation for volatility
estimation. The key macroeconomic indicators considered here include labor
market condition or employment reports (EMP) by the Australian Bureau of
Statistics, the consumer price index (CPI), GDP announcements, and information
flows on the US monetary policy changes—the Fed’s announcement on Fed Fund
Target changes. The effects of monetary policy releases and key macroeconomic
21
news announcements on mean returns and volatility of Australian financial futures
markets are then tested simultaneously by using equations (4) and (6).
Table 7 presents empirical results for the impact of cash rate target announcements,
together with the other three Australia macroeconomic announcements and the U.S.
Fed’s announcement on Fed Fund Target changes, on four Australian financial
futures markets. Parameter θ0, is negative and significant at the 5 % level for
AUD/USD futures and 3- and 10-year bond futures markets, indicating that the
Reserve Bank’s unexpected cash rate target announcement still plays a key role in
smoothing the volatility of the currency futures and T-bill futures markets while
other key macroeconomic announcements are considered. Monetary policy
surprises are transmitted into these three futures markets completely since all
parameters for the lagged effect of monetary policy announcements are
insignificant in this case. The monetary policy effect on volatility of stock index
futures is, however, insignificant when effects of other key macroeconomic
announcements are considered simultaneously in the ASX-SPI futures market. The
lagged impact of monetary policy surprises on the volatility of stock index futures
shows that the stock market reaction to monetary policy changes is quite sluggish
when
other
key
macroeconomic
announcements
are
considered.
CPI
announcements affect volatility of the 3-year T-bond futures market, while
employment reports reduce the volatility of the stock index futures market. News
announcements on the GDP growth rate have a strong impact on the volatility of the
ASX-SPI futures and the 3-year T-bond futures markets, while news on the Federal
Fund target rate, a key indicator of US monetary policy stance, only affects the
volatility of the stock futures market.
22
7. Summary and concluding remarks
The existing literature on the impact of monetary policy has documented the
relationship between macroeconomic announcements, monetary policy and asset
returns around those announcements. The literature has typically focused on a
single assets or asset class, in isolation of other markets, and does not separate the
unexpected component of the announcement from the entire policy target rate
movements.
This study contributes to the literature by using 30-day and 90-day bank bill rates to
gauge the unanticipated component of cash rate target changes in the Australian
money market. This method enables us to separate the surprises of monetary policy
announcements from the entire policy target rate movements and better model the
impact of monetary policy changes on three classes of Australian financial futures
markets—ASX stock price index futures, AUD/USD exchange futures and 3- and
10-year Treasury bond futures contracts. We find that the daily yield movement of
the 30-day BAB rate outperforms the 90-day BAB rate in measuring the expected
monetary policy changes.
Empirical results show that the Reserve Bank’s cash rate announcements have a
strong impact on the ASX-SPI stock index futures market and AUD/USD exchange
rate futures contracts. We have also documented strong announcement effects of
unexpected monetary policy changes on 3- and 10- year T-bond futures markets, by
using the 30-day BAB rate in measuring the expected monetary policy changes. The
23
degree of significance for these announcement effects depends largely on how we
measure the unanticipated component of regular and irregular monetary policy
announcements. We find that the 30-day BAB rate is the best proxy of the expected
monetary policy changes.
The paper also examines the speed with which returns and volatility of financial
futures markets incorporate the news content of monetary announcements by
assessing the lagged effects of the Reserve Bank’s cash rate target movements. The
empirical results indicate that the cash rate announcement effect is complete on the
announcement day for ASX-SPI futures and 3- and 10-year bond futures markets,
but not for the AUD/USD futures market, where market reaction to monetary policy
changes appears sluggish.
The effects of monetary surprises on the volatility of AUD/USD futures contracts
and 3- and 10-year bond futures markets are significant and complete when other
key domestic macroeconomic announcements and the U.S. Federal fund target
announcements are incorporated into a single equation. The result suggests that the
Reserve Bank’s cash rate target announcements play a superior role in determining
the prices and volatility of these financial futures assets. The lagged impact of
monetary policy surprises on the volatility of stock index futures shows that the
stock market reactions to monetary policy changes are quite sluggish when other
key macroeconomic announcements are considered.
24
References
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financial markets. Journal of Empirical Finance 4, 115-158.
Bollerslev, T., 1986. Generalized autoregressive conditional heteroskedasticity. Journal of
Econometrics 31, 307-327.
Bonser-Neal, C., Roley, V.V., Sellon, G. H. Jr., 2000. The effect of monetary policy
actions on exchange rates under interest-rate targeting. Journal of International Money
and Finance 19, 601-631.
Cook, T., Hahn, T., 1989. The effect of changes in the federal funds target on market
interest rates in the 1970s. Journal of Monetary Economics, 24, 331-351.
Demiralp, S., Jorda, O., 2004. The response of term rates to announcements. Journal of
Money, Credit, and Banking 36 (3), 387-405.
Dungey, M., Hayward B., 2000. Dating changes in monetary policy in Australia, Australian
Economic Review 33(3), 281-285.
Ederington, L. H., Lee, J. H., 2001. Intraday volatility in interest-rate and foreign-exchange
markets: ARCH, Announcement, and seasonality effects. Journal of Futures Markets 6,
517-552.
Jones, C, Lamont, O., Lumsdaine, R., 1998. Macroeconomic news and bond market
volatility, Journal of Financial Economics 47, 315-337.
Kearns, J., and Manners, P. 2005. The impact of monetary policy on the exchange
rate: A study using intraday data. Research Discussion Paper, 2005-02. Reserve
Bank of Australia.
Kuttner, K. N., 2001. Monetary policy surprises and interest rates: Evidence from the Fed
funds futures market. Journal of Monetary Economics 47, 523-544.
Li .L., Engle, R., 1998. Macroeconomic announcements and volatility of treasury futures.
Discussion Paper 98-27, University of California, San Diego.
25
Lobo, B. J., 2002. Interest rate surprises and stock prices. The Financial Review 37, 73-92.
Roley, V. V. and Sellon, G. H. Jr. (1998a). The Response of Interest Rates to Anticipated
and Unanticipated Monetary Policy Actions. Working paper, University of Washington.
Roley, V. V. and Sellon, G. H. Jr. (1998b). Market Reaction to monetary policy
Non-announcements. Research Working Paper, Federal Reserve Bank of Kansas
City.
Zakoian, J. M., 1994. Threshold heteroskedastic models, Journal of Economic Dynamics
and Control 18, 931-944.
26
Table 5.3 Impact of cash rate target changes on ASX-SPI futures market
__________________________________________________________________
Ri,t = b0 + b1 R i,t-1 + b2 Mt + εt
(5.4)
where εt |Φt-1 ~N (0, ht ), and
3
ht = ω + αεt-1 2 + β ht-1 + γ I -t-1 εt-1 2 +
∑θM
j
(5.5)
t-j
j=0
where R t is the daily return of ASX-SPI Futures contract from day t-1 to day t. Mt is cash
rate changes. Parameter θ0 captures the contemporaneous effect of cash target surprises. α
captures the ARCH effect, β captures the persistence in volatility. The presence of leverage
effect is tested by the hypothesis that the parameter γ < 0. The impact of past innovations
on current volatility is asymmetric if γ ≠ 0. In Model 1, monetary surprises are calculated
using 30-day BAB yield changes as anticipated component of cash rate movements. In
Model 2, monetary surprises are calculated using 90-day BAB yield changes as anticipated
component of cash rate changes. Model 3 utilizes actual cash rate target changes.
Panel A. Maximum likelihood parameter estimates for ASX-SPI futures market
_________________________________________________________________________
Model 1
Model 1
Model 3
with 30-day BAB
with 90-day BAB futures actual target changes
(1)
(2)
Coeff
S. E.
b0
0.0747
0.0513
0.0595
0.0343*
0.0587
0.0328*
b1
0.0189
0.0372
0.0233
0.0261
0.0244
0.0252
b2
0.8965
1.4399
0.5894
1.3638
0.5169
0.9748
ω
2.0393
1.4838
1.9539
1.8269
1.1535
0.4278**
α
0.0041
0.0072
-0.0011
0.0013
-0.0010
0.0061
γ
-0.0269
0.0016
0.0044
0.0154
0.0154
0.0135
β
0.4829
0.3774**
0.1560
0.7891
0.4555
0.2019**
θ0
6.5596
3.0345**
2.0302
5.0066
0.7476
3.2714
θ1
4.3806
2.9515
3.8670
2.0638
-1.0451
3.8615
θ2
3.5991
2.9104
3.2452
3.7370
1.7382
4.2332
θ3
3.7540
2.8258
3.8527
3.2209
2.6801
2.2578
(3)
Coeff
(4)
(5)
(6)
S. E.
Coeff
S. E.
_________________________________________________________________________
Panel B. Model diagnostics for standardized residuals
_________________________________________________________________________
Model 1
Mode 2
Model 3
_______________________________________________________________________
Mean
S. D.
Skew
Kurt
LB(10) for Zi,t
LB(10) for Z2i,t
-0.0104
0.7982
9.5586
295.863
10.674 (0.384)
0.0326(0.039)
-0.0041
1.0228
10.119
317.344
11.236(0.339)
0.0295 (0.017)
-0.0046
1.0648
10.237
322.191
11.359(0.330)
0.037 ( 0.067)
_________________________________________________________________________
Note: *denotes significance at 10%,
**denotes significance at 5%
27
Table 5.4
Impact of cash rate target changes on AUD/USD futures market
_________________________________________________________________________
Ri,t = b0 + b1 Ri,t-1 + b2 Mt + εt
(5.4)
where εt |Φt-1 ~N (0, ht ), and
3
ht = ω + α εt-1 2 + β ht-1 + γ I -t-1 εt-1 2 +
∑θM
j
(5.5)
t-j
j=0
where Rt is the daily return AUD/USD futures contract from day t-1 to day t. Mt is
unexpected cash interest rate changes. Parameter θ0 captures the contemporaneous effect of
cash rate target surprises. α captures the ARCH effect, β captures the persistence in
volatility. The presence of leverage effect is tested by the hypothesis that the parameter γ <
0. The impact of past innovations on current volatility is asymmetric if γ ≠ 0. In Model 1,
monetary policy surprises are calculated using 30-day BAB yield changes as the anticipated
component of cash rate movements. In Model 2, monetary policy surprises are calculated
using 90-day BAB yield changes. Model 3 utilizes actual cash rate target changes.
Panel A. Maximum likelihood parameter estimates for AUD/USD futures market.
_________________________________________________________________________
Model 1
Model 2
Model 3
with 30-day BAB
with 90-day BAB futures actual target changes
___________________________________________________________________
(1)
(2)
Coeff
S. E.
b0
0.0289
b1
(3)
(4)
(5)
(6)
Coeff
S. E.
Coeff
S. E.
0.0194
0.0308
0.0195
0.0360
0.0187*
-0.0496
0.0261*
-0.0372
0.0276
-0.0397
0.0280
b2
0.5253
0.5133
-1.4359
0.5007**
0.7777
0.1426**
ω
0.3238
0.0957**
0.3279
0.0989**
0.0148
0.0069**
α
-0.0463
0.0165**
-0.0413
0.0227*
0.0061
0.0152
γ
0.1392
0.0483**
0.1445
0.0525**
0.0412
0.0204**
β
0.3808
0.1836**
0.3705
0.1863**
0.9448
0.0200**
θ0
-3.5189
0.3119**
2.0732
2.1601
-1.2033
0.4502**
θ1
3.0273
4.1639
0.7798
1.7935
0.2498
0.5651
θ2
-1.8156
2.0259
-1.1599
1.0138
0.2413
0.6511
θ3
-2.0777
0.9923**
-1.3963
0.5138**
0.2885
0.5271
_________________________________________________________________________
Panel B. Model diagnostics for standardized residuals
_______________________________________________________________________
Model 1
Model 2
Model 3
_________________________________________________________________________
Mean
-0.0144
-0.0171
-0.0198
S. D.
1.0107
1.0052
1.0070
Skew
-0.2236
-0.2270
-0.2480
Kurt
4.0836
4.0895
4.1217
LB(10) for Zi,t
7.3902(0.688)
6.880(0.737)
4.776(0.906)
LB(10) for Z2i,t 24.006(0.008)
22.631(0.012)
2.923(0.983)
_________________________________________________________________________________
Note: *denotes significance at 10%,
**denotes significance at 5%
28
Table 5.5
Impact of cash rate target changes on 3-year T-bond futures market
_________________________________________________________________________
Ri,t = b0 + b1 Ri,t-1 + b2 Mt + εt
(5.4)
where εt |Φt-1 ~N (0, ht ), and
3
ht = ω + α εt-1 2 + β ht-1 + γ I -t-1 εt-1 2 +
∑θM
j
(5.5)
t-j
j=0
where Rt is the daily return 3-year T-bond futures contract from day t-1 to day t. Mt is cash
interest rate changes. Parameter θ0 captures the contemporaneous effect of cash target
surprises. α captures the ARCH effect, while β captures the persistence in volatility. The
presence of leverage effect is tested by the hypothesis that the parameter γ < 0. The impact
of past innovations on current volatility is asymmetric if γ ≠ 0. In Model 1, monetary policy
surprises are calculated using 30-day BAB yield changes as anticipated component of cash
rate movements. In Model 2, monetary policy surprises are calculated using 90-day BAB
yield changes as anticipated component of cash rate changes. Model 3 utilizes actual cash
rate target changes.
Panel A. Maximum likelihood parameter estimates for 3-year T-bond futures market
_________________________________________________________________________
Model 1
Model 2
Model 3
with 30-day BAB
with 90-day BAB futures actual target changes
_________________________________________________________________________
(3)
(4)
(5)
(6)
S. E.
Coeff
S. E.
(1)
(2)
Coeff
S. E.
b0
0.0017
0.0018
0.0012
0.0024
0.0014
0.0017
b1
-0.0046
0.0287
0.0029
0.0283
-0.0096
0.0273
b2
-0.4911
0.1085**
-0.0659
0.0848
0.0095
0.0488
ω
9.52E-05
5.01E-05*
0.0039
0.0023*
-1.47E-06
3.57E-06
α
0.0493
0.019**
0.0242
0.0466
0.0030
0.0045
γ
-0.0096
0.0201
-0.0977
0.0473**
-0.0081
0.0019**
β
0.9380
0.0209**
0.4778
0.3145
1.0008
0.0048**
θ0
-0.0284
0.0101**
-0.0207
0.0164
-0.0066
0.0066
θ1
0.0060
0.0230
-0.0144
0.0100
-0.0026
0.0107
θ2
-0.0038
0.0282
0.0026
0.0419
0.0038
0.0087
θ3
0.0118
0.0190
-0.0004
0.0237
0.0018
0.0010
Coeff
_________________________________________________________________________
Panel B. Model diagnostics for standardized residuals
________________________________________________________________________
Model 1
Model 2
Model 3
Mean
-0.0142
-0.0005
0.0066
S. D.
0.9947
0.8611
0.9959
Skew
-0.0581
-0.1139
0.0121
Kurt
4.1979
4.5243
3.7760
LB(10) for Zi,t
6.351 (0.786)
6.425(0.778)
6.002 (0.815)
60.385(0.000)
13.309(0.207)
LB(10) for Z2i,t 12.934(0.227)
_________________________________________________________________________________
Note: *denotes significance at 10%,
**denotes significance at 5%.
29
Table 5.6
Impact of cash rate target changes on 10-year T-bond futures market
_________________________________________________________________________
Ri,t = b0 + b1 Ri,t-1 + b2 Mt + εt
(5.4)
where εt |Φt-1 ~N (0, ht ), and
3
ht = ω + α εt-1 2 + β ht-1 + γ I -t-1 εt-1 2 +
∑θM
j
(5.5)
t-j
j=0
where R i,t is the daily return 10-year T-bond futures contract from day t-1 to day t. Mt is
cash rate changes. θ0 captures the contemporaneous effect of cash target surprises. β
captures the persistence in volatility, while α captures the ARCH effect. The presence of
leverage effect is tested by the hypothesis that the parameter γ < 0. The impact of past
innovations on current volatility is asymmetric if γ ≠ 0. In Model 1, monetary policy
surprises are calculated using 30-day BAB yield changes as anticipated component of cash
rate movements. In Model 2, monetary policy surprises are calculated using 90-day BAB
yield changes as anticipated component of cash rate changes. Model 3 utilizes actual cash
rate target changes.
Panel A. Maximum likelihood parameter estimates for 10-year T-bond futures market
_________________________________________________________________________
Model 1
Model 2
Model 3
with 30-day BAB
with 90-day BAB futures actual target changes
_________________________________________________________________________
(1)
(2)
Coeff
S. E.
b0
0.0020
b1
(3)
(4)
(5)
(6)
Coeff
S. E.
Coeff
S. E.
0.0019
0.0017
0.0021
0.0022
0.0019
-0.0279
0.0231
-0.0271
0.0281
-0.0340
0.0255
b2
0.1406
0.1475
0.0487
0.2599
-0.0180
0.0574
ω
0.0045
0.0041
0.0039
0.0014**
0.0048
0.0042
α
-0.0459
0.0144
0.0168
0.0728
-0.0463
0.0083
γ
0.0555
0.0341**
-0.0906
0.0705
0.0511
0.0332
β
0.1500
0.7903
0.4820
0.1907**
0.1019
0.7985
θ0
-0.0345
0.0029**
-0.0213
0.0190
-0.0127
0.0071*
θ1
-0.0157
0.0346
-0.0141
0.0132
-0.0014
0.0119
θ2
-0.0231
0.0241
-0.0078
0.0199
-0.0132
0.0051*
0.0050
0.0213
0.0016
0.0117
0.0092
0.0309
θ3
_________________________________________________________________________
Panel B. Model diagnostics for standardized residuals
_________________________________________________________________________
Model 1
Model 2
Model 3
_________________________________________________________________________
Mean
S. D.
Skew
Kurt
LB(10) for Zi,t
LB(10) for Z2i,t
-0.0093
1.0007
-0.1786
4.0472
11.51 (0.319)
12.386(0.260)
-0.0017
0.8539
-0.2214
4.1884
12.356 (0.262)
34.201 (0.000)
-0.0102
0.9966
-0.1758
4.0469
11.026 (0.355)
12.504 (0.253)
_______________________________________________________________________
Note: *denotes significance at 10%,
**denotes significance at 5%
30
Table 5.7
The impact of cash rate target changes and macroeconomic news on Australian
financial futures markets
_________________________________________________________________________
Ri,t = b0 + b1 Ri,t-1 + b2 Mt + εt
(5.4)
4
2
ht = ω + α εt-1 2 + βht-1 + γ I -t-1 εt-1 2 +
∑
θi MD t-i +
∑
φj Aj
(5.6)
j=1
i=0
where Ri,t is the daily percentage changes of returns from the four futures markets from day
t-1 to day t. Mt is unexpected monetary policy surprises measured by using 30-day bank bill
rate. Ait stands for scheduled macroeconomic announcement dummies, representing
Consumer Price Index (CPI), employment (EMP), growth rate of Gross Domestic Product
(GDP) and the US Federal Reserve Bank’s announcement on Fed Fund Target changes.
Ait =1 if announcement j is released in day t, and Ait = 0 otherwise. MD t is dummy variables
for monthly monetary policy release of the Reserve Bank’s policy stance. MD t =1 for the
first Wednesday of each calendar month on which the Reserve Bank of Australia reviews
its monetary policy, and MD t = 0 otherwise.
Panel A. Maximum likelihood parameter estimates for the four futures markets
_________________________________________________________________________
ASX-SPI futures AUD/USD futures 3-year bond futures 10-year bond futures
_________________________________________________________________________
b0
b1
b2
ω
α
γ
β
θ0
θ1
θ2
φ1
φ2
φ3
φ4
Coeff
0.037
0.024
1.396
2.560
-0.002
0.033
0.151
-3.393
1.974
5.534
-0.391
-1.242
-1.596
6.727
S. E.
0.053
0.036
3.927
0.287**
0.000**
0.038
0.075**
13.65
9.648
1.460**
0.552
0.491**
0.337**
0.338**
Coeff
0.029
-0.051
0.467
0.291
-0.047
0.151
0.420
-3.495
3.200
-2.045
-0.030
0.419
0.049
0.049
S. E.
0.019
0.027*
0.577
0.088**
0.013**
0.049**
0.169**
0.370**
4.136
2.011
0.163
0.325
0.113
0.080
Coeff
0.002
-0.010
-0.492
0.001
0.056
0.017
0.797
-0.028
0.003
-0.001
0.003
0.000
0.002
0.001
S. E.
0.002
0.029
0.082**
0.0003**
0.031*
0.039
0.062**
0.008**
0.026
0.022
0.001**
0.001
0.001**
0.001
Coeff
0.002
-0.033
0.138
0.003
-0.051
0.077
0.410
-0.032
-0.015
-0.006
0.004
0.000
0.002
0.000
S. E.
0.002
0.026
0.029**
0.001**
0.007**
0.034**
0.256
0.004**
0.016
0.026
0.004
0.003
0.001*
0.001
_________________________________________________________________________
Panel B. Model diagnostics for standardized residuals
_______________________________________________________________________
ASX-SPI
AUD/USD
3-year bond
10-year bond
_________________________________________________________________________
Mean
S. D.
Skew
Kurt
LB(10) for Zi,t
LB(10) for Z2i,t
-0.0035
0.8972
2.4439
61.122
26.368
(0.034)
9.7658
(0.834)
-0.0132
1.0095
-0.2228
4.0833
16.870
(0.327)
33.253
(0.004)
-0.0060
1.0023
-0.1061
4.1526
13.589
(0.557)
21.188
(0.131)
-0.0102
0.9990
-0.2134
4.0046
17.955
(0.265)
26.058
(0.037)
_______________________________________________________________________
Note: *denotes significance at 10%,
**denotes significance at 5%
31
Appendix 5.1 Dates and movements of the RBA’s cash rate target (CRT)
Oct 1990—March 2005
___________________________________________________________________
Date of
Changes
Level in Change of
Change in BAB yield
Unexpected CRT (%)
CRT(%) CRT(%)
30-day BAB 90-day BAB from (3)
from (4)
(1)
(2)
(3)
(4)
(5)
(6)
_________________________________________________________________________________
15/10/90
13.00
-1.00
18/12/90
12.00
-1.00
-0.41
-0.48
-0.59
-0.52
04/04/91
11.50
-0.50
-0.19
-0.45
-0.31
-0.05
16/05/91
10.50
-1.00
-0.40
-0.54
-0.60
-0.46
03/09/91
9.50
-1.00
-0.12
-0.27
-0.88
-0.73
06/11/91
8.50
-1.00
-1.02
-1.17
0.02
0.17
08/01/92
7.50
-1.00
-0.95
-0.98
-0.05
-0.02
06/05/92
6.50
-1.00
-0.80
-0.62
-0.20
-0.38
08/07/92
5.75
-0.75
-0.83
-0.89
0.08
0.14
23/03/93
5.25
-0.50
-0.45
-0.44
-0.05
-0.06
30/07/93
4.75
-0.50
-0.19
-0.30
-0.31
-0.20
17/08/94
5.50
+0.75
0.55
0.86
0.25
-0.11
24/10/94
6.50
+1.00
0.59
0.77
0.41
0.23
14/12/94
7.50
+1.00
0.23
0.93
0.77
0.07
31/07/96
7.00
-0.50
-0.10
-0.51
-0.40
0.01
06/11/96
6.50
-0.50
-0.46
-0.51
-0.04
0.01
11/12/96
6.00
-0.50
0.01
-0.04
-0.51
-0.46
23/05/97
5.50
-0.50
0.03
0.00
-0.47
-0.50
30/07/97
5.00
-0.50
-0.26
-0.42
-0.24
-0.08
02/12/98
4.75
-0.25
0.00
-0.07
-0.25
-0.18
03/11/99
5.00
+0.25
0.43
0.65
-0.18
-0.40
02/02/00
5.50
+0.50
0.36
0.34
0.14
0.18
05/04/00
5.75
+0.25
0.18
0.19
0.07
0.06
03/05/00
6.00
+0.25
0.32
0.25
-0.07
0.00
02/08/00
6.25
+0.25
0.11
0.06
0.14
0.19
07/02/01
5.75
-0.50
-0.51
-0.80
0.01
0.30
07/03/01
5.50
-0.25
-0.18
-0.28
-0.07
0.03
04/04/01
5.00
-0.50
-0.34
-0.24
-0.16
-0.26
05/09/01
4.75
-0.25
-0.17
-0.12
-0.08
-0.13
03/10/01
4.50
-0.25
-0.39
-0.50
0.14
0.25
05/12/01
4.25
-0.25
-0.23
-0.18
-0.02
-0.07
08/05/02
4.50
+0.25
0.22
0.44
0.03
-0.19
05/06/02
4.75
+0.25
0.29
0.30
-0.04
-0.05
05/11/03
5.00
+0.25
0.11
0.00
0.14
0.00
03/12/03
5.25
+0.25
0.25
0.16
0.00
0.09
02/03/05
5.50
+0.25
0.27
0.31
-0.02
-0.06
_________________________________________________________________________
Note: (5) = (2)-(3); (6) = (2)-(4).
Note that in the above table, CRT is RBA’s cash rate target. Column 1 is the level of CRT, Column
2 is changes in CRT, Columns 3 and 4 are changes in bank bill rates from the day after previous
target change to the day before a target change, using equation (1): ∆Recrt, t =R30 d, t-1 – R30 d, t- j + 1 (1)
where R30 d, t-1 is 30-day (90-day) BAB yield on the day before a target change, R30 d, t- j + 1 is 30-day
(90-day) BAB yield on the day after the previous target change made on day (t-j ). The monetary
surprises in columns 5 and 6 are then calculated as the difference between the actual and anticipated
target changes using equation (2) below
∆ Rucrt, t = ∆ Rcrt, t - ∆ Recrt, t,
(2)
32